4.1.5.6 Monopoly and monopoly power Quiz: AQA Economics, Unit 1

The 20 questions

1. Monopoly power is influenced by:

   • The number of employees in the industry only
   • The age of the company's founder and the length of time the firm has operated
   • The colour of the firm's logo and the location of its head office
   • Barriers to entry, the number of competitors, advertising and product differentiation

2. In the short-run monopoly model, a profit-maximising firm produces where:

   • P = MC on a perfectly elastic demand curve, so that the firm can sell any quantity it chooses at the single price set by the market
   • MR = MC, and the price is read from the demand curve at that output
   • Output is set where MC is at its minimum
   • AC = MR at the lowest point of average cost, which is the level of output at which the firm's unit costs are lowest in the period

3. Compared with a perfectly competitive market, a monopoly typically results in:

   • A higher price and lower output, creating a dead-weight loss
   • An equal price and output, since demand is identical
   • Higher output but lower consumer surplus in every period
   • A lower price and higher output, eliminating any dead-weight loss

4. A major advantage of monopoly often claimed is:

   • Guaranteed high consumer surplus for all buyers
   • Lower prices than under perfect competition in every case
   • Automatic allocative efficiency through competition
   • Economies of scale and investment in research that can lower costs and fund innovation

5. A disadvantage of monopoly is:

   • Higher prices and lower output than under competition, reducing consumer welfare
   • Permanent allocative efficiency through the absence of rivals
   • Lower costs, because competition is absent and so the firm is free to cut its spending on marketing
   • Greater product variety than in any competitive market

6. A monopolist faces demand P = 100 - 2Q and marginal cost MC = 20. Its profit-maximising output and price are:

   • Q = 40 and P = £20
   • Q = 80 and P = £60
   • Q = 20 and P = £20
   • Q = 20 and P = £60

7. Using P = 100 - 2Q and MC = 20, the dead-weight loss relative to the competitive outcome (P = MC = 20, Q = 40) is:

   • £400
   • £200
   • £1,600
   • £800

8. A monopolist's marginal revenue curve lies below its demand curve because:

   • Its marginal cost falls as output rises, so the cost of each extra unit is always lower than the price received for it in the market
   • Its demand is perfectly elastic at every level of output, so the firm can sell as much as it likes without changing the price at all
   • To sell an extra unit, it must lower the price on all units sold
   • It faces perfect competition in its input markets

9. Why might a monopolist not produce at minimum average cost?

   • Its profit-maximising output, where MR = MC, lies below the output at minimum average cost
   • It always produces the maximum output the market can absorb
   • Monopolists are legally prohibited from producing at minimum average cost
   • Average cost rises for a monopolist as its output increases

10. Barriers to entry make a monopoly more durable because they:

    • Make the monopolist's demand curve perfectly elastic, so that the firm can sell any quantity at the price its rivals have set
    • Prevent new firms from competing away the abnormal profit
    • Reduce the monopolist's fixed costs to zero, so that it can produce at any scale without facing overheads in the period
    • Force the government to set prices for the firm, which guarantees that the monopolist receives a fixed and predictable return

11. A pure monopolist raises its price from £4 to £5, and quantity demanded falls from 100 to 80. Total revenue changes by:

    • A fall of 80, because the lower quantity sold reduces the monopolist's revenue by more than the extra income from the higher price
    • A rise of 100, since each of the 80 units sold at the new price brings in more revenue than the 100 units did at the old price
    • No change, since total revenue is £400 in both cases
    • A rise of 80, because the higher price on each unit more than offsets the fall in the number of units the monopolist sells

12. The welfare loss from monopoly is best measured by:

    • The total fixed costs of the monopolist
    • The total profit earned by the monopolist
    • The difference between average revenue and average cost at the monopolist's output only
    • The dead-weight loss, the area between the demand curve and marginal cost over the output not produced

13. Monopoly power is greater when a firm:

    • Has marginal cost above average revenue at every output, so the firm makes a loss at every level of production it can choose
    • Faces a less elastic demand curve with few close substitutes
    • Is a price taker in its market, accepting the market price set by the forces of supply and demand in every period of trading
    • Faces many close substitutes and easy entry

14. A monopolist has marginal cost £6 and sets a profit-maximising price of £12. Which statement is consistent with this?

    • The price elasticity of demand is infinite, since the monopolist is a price taker
    • The price elasticity of demand is 1, since price is double marginal cost
    • The price elasticity of demand at that output is 2 in absolute value
    • The price elasticity of demand is 0.5 in absolute value

15. Why might a monopolist invest in advertising?

    • To eliminate barriers to entry in its own market, since public advertising informs potential rivals of the firm's plans and capacity
    • To reduce its marginal revenue to zero, since advertising lowers the revenue earned on each unit and so reduces the firm's tax bill
    • To make demand perfectly elastic so that it can sell at any price it chooses, because buyers will then accept any price the firm sets
    • To differentiate its product and make demand less elastic, supporting its monopoly power

16. A natural monopoly arises when:

    • Economies of scale mean one firm can supply the market at lower average cost than several firms could
    • The government grants a licence to every firm in the market, so that each licensed supplier is able to operate without facing any rival
    • Firms collude to restrict output in the market
    • Demand is perfectly elastic at the market price

17. A water company is a natural monopoly. Why might regulation be needed?

    • To ensure it has no fixed costs and can operate freely
    • To stop it charging prices above cost or restricting output, while still letting it cover its costs
    • To make the market perfectly competitive by law
    • To guarantee the company an abnormal profit in every period

18. Which statement best evaluates the claim that monopoly is always bad for society?

    • It is always bad because monopolies never invest in research
    • It is always good because monopolies achieve allocative efficiency
    • It can reduce consumer welfare through higher prices, but scale and innovation may benefit society, so the effect depends on the market
    • It is neutral because monopolies have no effect on prices or output

19. A monopolist's average revenue is £50 and its average cost is £30 at its output. Its profit per unit is:

    • £50 per unit, since average revenue alone measures profit
    • £80 per unit, from adding average revenue and average cost
    • £20 per unit, with both measures taken at the same output
    • £30 per unit, since average cost equals profit

20. Monopoly power is also referred to as:

    • Market share alone, measured by the number of customers the firm serves, with no reference to the prices it is able to charge them
    • Market power, the ability to set prices above marginal cost
    • Perfect knowledge of all market prices, which allows the firm to know exactly what rivals will charge in each period of trading
    • Price-taking behaviour in the market, where the firm accepts the price set by the forces of supply and demand in each period

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